Almost half of high-yield credit investors and 14 percent of investment-grade credit buyers surveyed by Bank of America Corp. are sitting on above-average amounts of cash this month. For junk-bond investors, that’s the highest cash allocation since March 2016. Open-ended corporate bond funds held an average of 2.32 percent of their holdings in cash at the end of the first quarter, the highest since the first quarter of 2015, according to Morningstar data.
Lower Volume
Investors’ reluctance to buy now may also explain why corporate bond trading volume fell by about 20 percent from the first three months to April, averaging $28.5 billion a day that month, according to the Securities Industry and Financial Markets Association. Fixed-income trading revenue in general for the big banks could fall about 5 percent in the second quarter, JPMorgan Chase & Co. analysts wrote in a note on Tuesday.
Many money managers say they don’t like their options, according to the Bank of America survey. Seventy-eight percent of high-yield money managers said they think bonds are overvalued at current prices, up from just 25 percent in the same month last year.
Even if cash is hot, investors keep buying new bond issues. Becton, Dickinson & Co. received $35 billion of orders for its $9.7 billion debt sale on Monday, according to a person familiar with the matter. Risk premiums on investment-grade corporate bonds, at around 1.12 percent on average, are close to their narrowest levels since 2014.
“There’s a lot of capital that’s been reaching for yield and duration for a long time that’s going to start to see negative numbers,” said Henry Peabody, a money manager at Eaton Vance Corp., referring to an eventual drop in bond prices. Eaton Vance manages $381 billion. “With that, there’s going to be opportunity for those who can take advantage of it.”
This article was provided by Bloomberg News.